International Finance Report: ABF Performance and Risk Analysis

This report provides an in-depth analysis of the international financial environment and its impact on Associated British Foods (ABF). It begins with an introduction to international finance, focusing on key elements such as exchange rates and foreign direct investment. The report then examines two recent developments—US trade disruptions and Brexit—and their impact on ABF's performance, including decreased sales revenues and increased costs. It also delves into ABF's international financial and risk management strategies, covering sources of finance and dividend policies. The core of the report is a financial analysis of ABF's performance from 2019 to 2020, utilizing ratio analysis to assess liquidity, profitability, and efficiency. The analysis reveals a decline in key financial metrics, such as return on capital employed and net profit margin, attributed to the challenging international financial climate. The report concludes by emphasizing the need for ABF to adapt its strategies to mitigate risks and maintain growth in a volatile global market.

INTERNATIONAL FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
ASSESSMENT TASK....................................................................................................................1
a) The two recent developments in international financial environment that have impacted the
performance and development of the..........................................................................................1
b) Key elements of international financial and risk management strategy..................................2
c) The financial analysis of the performance and position of the Associated British Foods for
the year 2019-20 with the use of ratio analysis...........................................................................4
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUTION
International Finance is also known as the international macroeconomics that refers to study
of the monetary interactions between the two or more nations. They focus mainly over the
exchange rates, interest rates and foreign direct investment. In a globalised environment every
country depends over other for the services and the products from the developing countries. The
present report discusses about recent developments in international financial environment and
that have impacted the performance and development of the company. It will also analyse the
impact of these developments in near future. Study will provide about the international financial
and risk management strategy. Further major part of the report will cover the analysis of
performance of the company for the year ending 2019 and 2020 with the use of ratio analysis.
This has proved to be useful tool for analysing the performance and for taking sustainability
measures. It will discuss about Associated British food which is packaged food retailing and
processing company listed over London Stock Exchange. It has spaces across United States and
Europe.
ASSESSMENT TASK
a) The two recent developments in international financial environment that have impacted the
performance and development of the
The roaring twenties have started with the post war economic prosperity which ended
with Wall Street Crash. The international financial developments or changes have impacted the
business. There are several changes that have occurred in the year 2019 and 2020 having
significant impact over the business and its practices. The changes for the politics and the Post
Brexit negotiation have not directly but indirectly have impacted the company and its
development. The two changes impacted the performance of Associated British Foods
1 US Trade Disruptions
The US being a major economy of the world has direct impact over all the other nations
associated with it. Country is major trade partner of the company and therefore the new trends of
the US economy and financial changes are to be considered by the company too. The political
environment of the country is having several trade negotiations about increasing the tariff rates
and the exchange rate fluctuations (Rădulescu, 2016). The trump government has imposed
significant trade restrictions and imposed heavy tariffs that have led the business to suffer losses.
The sales revenues have decreased and also higher tariffs have led them to suffer decrease in the
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profit margins. However, company has managed to deal the disruptions by increasing the sales in
other market places. US consists of big market share of the company and it has to manage the
operations of business accordingly for maintaining and increasing the share further. The
elections in next year may bring some new changes for the company.
2 Brexit
The impact of Brexit is seen by almost all the companies of UK. This has resulted in around
6% reduction in the investments and lowering the employment by 1.5% lower. The company is
now required to bear the new costs that have risen due to the post Brexit. It has impacted the
business as company has to pay taxes over the trade to EU nations. Many of the businesses are
impacted due to this post Brexit. It could be evaluated that the business due to have seen lower
productivity. This has led to the business to adopt new strategies for restructuring the policies
and take new actions for the business for maintaining their revenues and achieving a
considerable growth. The costs have been increased and the sales have not grown up to the
required level.
Impact in future
These changes have led the company to manage the policies and procedures so that the
impact over business could be reduced. These changes may further increase the costs of
company causing it to increase the prices of products. ABF may see effect over its sales and
revenues due to the trade disruptions and the Brexit in future also (Blazsek, 2018). It is required
to expand the business over new markets for maintaining the growth and sustainability of the
business. It is essential for the business to ensure that it carefully manages the risks associated
with these changes in the international finance environment.
b) Key elements of international financial and risk management strategy
Sources of Finance
It refers to the sources from which company raises its finances. The sources of finance is
a significantly important decision of the company as it impacts the whole capital structure of the
business. It serves the costs and benefits of the organisation therefore the financial sources are
chosen with very deep analysis of the costs and sources.
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Due to the US trade disruption prevailing the change is seen in the interest rates that has
made the finance costlier than before. Due to the increasing costs of finance the company has not
raised the finance this year from any of the sources.
The international financial strategy of the company regarding the raising of finance has
put at hold over the current year. Company considers equity and debentures as profitable source
of finance as compared with other sources (Kamalu and et.al., 2019). It is also evaluated from
the financial statements of the business that it has not raised funds this year seeing the current
economic financial environment. The working capital requirements are also met by the company
using the own resources without raising the funds from external sources. The costs of raising
short term finance is also high due to increase in the interest rates in international markets.
As risk management strategy company has repaid many of its liabilities and debts. It has
also managed to maintain its reserve. It has suffered the currency exchange differences due to
these changes. The risk management of the ABF could be considered as strong as it has led the
company to manage the operations very efficiently without raising finance from external sources.
The company may be able to manage the funds requirements for the working capital in the next
year too with its available resources. All the proposed projects of the company are kept at hold
due to the changing financial environment giving a pause to the growth of company.
Dividend policy
The dividend policy of the company is considered to be policy that affects the future
business performance and operations. The motive of the investors in any company is to earn
adequate returns over their investments. It could also be assessed from the dividends that there
has been decline in the dividends from last year due to significant decline in the profits of
company from last year (Messori, 2018). The profits due to the ongoing international financial
environment are cut to half as compared with the last year. However to retain the confidence of
investors it has paid the dividends in current year also. It is seen that many of the companies
have postponed or denied the dividend payment decisions due to the increase in trade tariffs of
US which has the large market share of company. The sales have declined impacting the profits
of company.
Payment of the dividend to company could be considered as the risk management strategy
that to retain the interest of investors and for retaining the market position. The dividend policy
directly impacts the position of company in financial markets affecting its share prices. The
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policy of dividend has affected the performance and reduced the reserves. It is required to ensure
that the management policies regarding the dividend do not impacts the future position and
performance of company.
c) The financial analysis of the performance and position of the Associated British Foods for the
year 2019-20 with the use of ratio analysis
Associated British Foods is a big multinational of the UK who is known for retaining and
processing the packaged foods. Company is a big giant of its field having place of business in
different countries of Europe and significant market in US. Company is performing well since
many years by properly managing the national and international financial environment
adequately (Rodrigues, Felício and Matos, 2020). But the company has seen significant decline
in its profits and losses during the current year due to various trade disruptions going in the
international financial market. The financial analysis of the performance and position is carried
out for the year 2019-20.
Associated British Foods plc
2019 2018 Change
Liquidity ratio
Current assets 5753 5596
Current liability 3153 3068
Inventory 2150 2386
Quick Assets 3603 3210 11%
Current ratio
Current assets / current
liabilities 1.82 1.82 0%
Quick Ratio
(Current Assets - Inventory) /
Current Liabilities 1.14 1.05 8%
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Profitability ratio
Employed Capital 13516 10692
Net operating
profit 686 1173
Return on capital
employed
Net operating profit/Employed
Capital 5.08% 10.97% -116%
Cost of Sales 13046 14524
Sales 13937 15824
Gross Margin
Total Sales – COGS/Total
Sales 6.39% 8.22% -29%
Net profit 686 1173
Sales 13937 15824
Net profit ratio Operating Income/ Net Sales 4.92% 7.41% -51%
Efficiency Ratios
Inventory 2150 2386
Trade Receivables 1328 1436
Net Assets 9439 9550
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Cost of Sales 13046 14524
Sales 13937 15824
Asset turnover
ratio Sales / Net assets 1.48 1.66 -12%
Inventory
turnover ratio Sales / Inventory 6.07 6.09 0%
Account
receivable
turnover ratio Sales / Accounts Receivable 10.49 11.02 -5%
Investment
Debt 318 361
Equity 9439 9550
Debt equity ratio Debt/ Equity 3.37% 3.78% -12%
Net Income 686 1173
Shareholder's
Equity 9439 9550
Return on Equity
Net Income / Shareholder's
Equity 7.27% 12.28% -69%
Profitability Ratios
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Return on capital employed of the company has declined to 5.08% from 10.97%. The
return has declined to half in the present year. The return is measures for assessing the efficiency
of the management in making use of its available resources. The significant decline in the return
is seen mainly due to the decrease in profit levels and the rise in capital employed. It is seen due
to acquisition of new capital assets for the advancement of the processes at lower cost and
increasing the productivity (Abor, 2017). It is required to increase the return for presenting
good management efficiency.
Gross profit margin of the company shows the amount left with company after carrying
out its trading activities. The higher gross profits are required for running the business
efficiently. Current gross profit is 6.39% with fall of 29% from previous year (Associated
British Foods plc, 2020). The downward shows that revenues of company has declined and also
the costs have increased due to the trade barriers and currency exchange differences. Company is
required to adopt strategies and policies that will enable it to increase its sales.
Net profit margin has shown 51% decline in the net profits from current year that has
brought it to 4.92% from 7.41% in 2019. This significant decline in the profits shows that
company has suffered significantly during the current year because of these international market
changes. At the same time costs have not been controlled at the same scale (Moshchenko and
et.al., 2019). It is essential for the business to make changes in its policies and procedures for
managing these changes as they may further impact the business.
Liquidity Ratios
Current Ratio of company has remained stable at 1.82% in both the years. The impact of
these international changes and other policy changes are not seen on the cash reserves and
current ratio. It has effectively managed the liquidity position after paying dividends and not
raising funds from external sources for running the business operations (Odero, 2017). It has to
maintain the policies adopted for keeping stable the liquidity position of company through close
monitoring.
Quick ratio shows negative movement of 8% in current year. The ratio is below the
standards of 1.5 which means the management is required to increase the efforts to strengthen its
liquidity position as it influences the business image significantly.
Efficiency Ratios
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Asset Turnover has declined by 12% in current year. It measures the management
efficiency in generating revenues over the assets of firm. The ratio has declined but is not
significant. It shows that management is required to take effective measures for increasing its
sales.
Inventory turnover of company is 6.07 in 2020 and was 6.09 in previous year. The
inventory ratio of the company is adequate as compared with the industry (Ovais, Lakshmi and
Guru, 2020). This is seen as it is a big company and inventory stocks are high as compared with
other firms.
Accounts receivable turnover ratio of company is also 10.49 which is adequate. The
management has decreased the collection period due to exchange differences causing company
to suffer losses.
Investor Ratio
Debt Equity Ratio shows the capital structure of company. There has been decline in the
debt of company in current year and it is 3.37% as against the equity which is not high. The
financial risk of company is very low which could attract good investors if it goes for equity
funds (Kolte and et.al.,2019 2019). The capital structure of the company is equity oriented and
has less risks.
Return on Equity of company is also very low due to the different issues faced by the
company this year. ROE has declined to 7.27% this year due to significant decline in profits. It is
required to take immediate steps as the effects may be seen in next year also affecting the global
performance and position of company.
CONCLUSION
From the above study it could be concluded that the international financial environment has
significant impact over the performance of business. It could be evaluated in the above report
that changes of the international financial environment have dropped the profit level to half just
in one year. It is essential for the company to frame new strategies and policies for dealing the
changes effectively.
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REFERENCES
Books and Journals
Rădulescu, A., 2016. Recent Developments In The International Financial Markets.
Blazsek, V.I., 2018. The European Aspects of Global Financial Developments. J. Bus.
Entrepreneurship & L.. 11. p.233.
Messori, M., 2018. Financial instability and developments in the European Monetary
Union. Revue de l'OFCE, (4), pp.253-266.
Kamalu, K., and et.al., 2019. Causal link between financial developments, financial inclusion
and economic growth in nigeria. International Journal of Scientific and Technology
Research. 8(12). pp.2757-2763.
Rodrigues, R., Felício, J.A. and Matos, P.V., 2020. Corporate Governance and Dividend Policy
in the Presence of Controlling Shareholders. Journal of Risk and Financial
Management. 13(8). p.162.
Abor, J.Y., 2017. Understanding and Analysing Financial Statements. In Entrepreneurial
Finance for MSMEs (pp. 171-197). Palgrave Macmillan, Cham.
Moshchenko, O.V., and et.al., 2019. MULTIMETHODOLOGY FOR ANALYSING
FINANCIAL STATEMENTS OF ENTERPRISES ON THE EXAMPLE OF RUSSIAN
FUEL AND ENERGY COMPANIES’CURRENT ASSETS.
Odero, E.E., 2017. Analysing the Financial Performance at the Municipality of
Karibib. European Journal of Research and Reflection in Management Sciences Vol, 5(2).
Ovais, D., Lakshmi, V.S. and Guru, M.K., 2020. Analysing The Predictors Of Turnover
Intention In Manufacturing Sector In Bhopal. Solid State Technology, 63(6), pp.10258-
10269.
Kolte, A., and et.al.,2019 Analysing the financial state of selected Indian information technology
companies: the assessment towards foreseeing the future of industry.
Online
Associated British Foods plc. 2020. [Online]. Available through : <
https://www.abf.co.uk/investorrelations/reports >.
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